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written by khatabook | August 1, 2022

Understanding How the Franchise Model Works

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The concept of franchises was used in European generations earlier and has evolved into an effective business method. The word "franchise" has its roots in the French word “franchir”, which means "free". The "franchisor" grants permission to an independent business owner, known as the "franchisee," to use its business model, branding, and other property. This model is known as franchising or a franchise business model

In exchange, the franchisee agrees to pay the franchisor an initial franchise fee and monthly royalties. Simply put, a franchisee runs a business using the franchisor's brand name and trademark. The franchisee and franchisor have a legal business relationship. In the franchise model, the franchisee uses a franchisor's brand name and, in return, sells the franchisor's goods or services. 

Did you know? The biggest franchise in the world is still McDonald's, even though Subway has more outlets.

Relationship Between Franchisor and Franchisee in the Franchise Business Model

A franchisee has the right to open a franchised site utilising the franchisor's operations and licenced logos after purchasing a franchise under the terms of an FDD (Franchise Disclosure Document). A franchise agreement grants a franchisee the right and duty to open and run a franchised site. 

In the franchise industry, a franchisee and a franchisor have a close relationship that is crucial to the brand's success. The franchisor initially assists the franchisee in product development, marketing, training, and occasionally finance. As their partnership continues, the franchisor offers adequate assistance so that the franchisee's business keeps expanding. In the franchise model, the franchisee manages the firm as if it were their own. 

The franchisor is the parent organisation that, in exchange for a predetermined fee, allows franchisees to run their businesses using the same goods or services, brands, methods, etc. Typically, a franchisor has a large number of franchisees, and there can only be one franchisor for a franchisee. The franchise agreement regulates the connection between the franchisee and the franchisor. 

Types of Franchise Ownership in Franchise Model

The following are the types of franchise model business plans

1. Single-Unit Franchisee

A franchisee with a single branch of the business is referred to as a single-unit franchisee. This is the most typical form of franchise ownership. 

2. Multi-Unit Franchisee

After establishing a successful branch, a franchisee may decide to build more locations under the same franchisor. Multi-unit franchisees are those franchisees who own multiple franchises. 

3. Market Franchisee

Market franchisees act as a sort of middleman between a franchisee and a franchisor. They resemble multi-unit developers who must open a certain number of branches at any given site within a specified time. The market franchisee can sell the rights to other franchisees. 

What Role Does a Franchise Agreement Play in a Franchise Business Model? 

A formal franchisor and franchisee contract is known as a franchise agreement. It is the primary contract in the franchise model on which the connection between the franchisor and franchisee is built. The contract must be signed by both the franchisor and the franchisee. Some of the key topics discussed in a franchise agreement include the following: 

  • Information on the franchisee and franchisor
  • Franchisee selection and licence issuance
  • The franchisee's location
  • Development at the franchisee location
  • Maintenance of location of the franchisee
  • Trademarks or proprietary symbols that the franchisee may employ
  • Licences or authorisations granted by the franchisor that the franchisee must get or may utilise
  • Standards relating to quality
  • Assistance and training from the franchisor (if taken)

Also Read: 10 Best Business Ideas to Start Under ₹5 Lakhs Investment

How Does a Franchise Model Work?

These days, the franchise model is trendy.  It is because franchise ownership appeals to business enthusiasts as starting a company from scratch involves a great deal of risk.  Making a brand name, getting innovative brands ready for market, and setting up an operational system are the difficulties new firms must overcome in their early phases.  Establishing a position in the market takes years of perseverance and hard work.  On the other hand, franchising has many advantages over starting a company from scratch.  These advantages include an established brand identity and adequate franchisor support.  

Process of Franchise Business Model

The franchising method differs according to the type of franchise agreement, the state, and franchisor policies. A typical franchising process will look like this:

1. Assemble Background Data

First, figure out what kind of franchise you want to start. Ensure you are confident of the benefits you expect from opening a franchise. Next, make a list of the franchisors that interest you. Prioritise choosing companies that fit your objectives, financial constraints, and business expectations. Research the legal issues connected with a specific industry or area to open a franchise in your state.

2. Contact the Franchisor 

Set up a meeting by getting in touch with the franchisor's representative. You can learn more about the company in a face-to-face meeting, which will help your decision-making. The duration of the company's existence, its growth strategy, and risk concerns are important points to consider. After the interview, the franchisor may provide you with their franchising pamphlets, policies, and other suitable introductory material for prospective franchisees. 

3. Conduct Negotiations 

It's time to negotiate the partnership conditions, assuming early discussions go well and the franchisor satisfies your primary requirements. Preparing yourself by learning great bargaining techniques and tactics is a plus because this step is tricky. 

4. Signing the Agreement 

The next stage is to sign a formal agreement when both the parties agree to the terms on the table. Consider hiring a legal advisor to advise you at this point. Spend time reviewing the contract to ensure it is as precise and clear as possible to prevent confusion and future problems. 

Also Read: What is a Business? - Business Meaning, Characteristics, Types & More!

Benefits of Being Associated With a Franchise Business Model

There are various advantages to franchising besides continuous support from the franchisor. The following are a few advantages of franchise businesses: 

  •  Work With a Well-known Brand 

A powerful brand will increase client loyalty, open up more sales prospects, and give your company a competitive edge.

  •  Decreased Risk in Comparison to Starting Your Own Business

The risk of failure is relatively low if you work with a reputable franchisor. Investing in a franchise model is easier and less risky than starting a business from scratch.

  •  Easier Procurement Procedures

By franchising, you'll have access to reputable suppliers and better prices, which is an additional benefit. 

  •  Marketing and Advertising

The franchisor will run advertising campaigns and promotions that will benefit your company. Additionally, the franchisor will study the most probable market locations and share the results with you.

  •  Lower Operating Costs and Superior Leadership

The franchisor will instruct and support you. They are responsible for all the investment in brand expansion. This model gives you a leadership position with lower operating costs.

The franchise disclosure document or FDD is the legal basis for selling a franchise. Both the state and central franchising legislation have it as a core necessity. The FDD requires a franchisor to share all franchise disclosure documents with the appropriate state regulators. 

Also Read: What Is Business Development - Complete Guide on Business Development Strategy for Successful Business

Conclusion:

The franchisor and the franchisee can benefit from the franchising business model in various ways. Individual franchise owners often pay a franchising fee at low capital and royalties to the franchisor. The franchisor may invest the money from franchisees to expand the company and its name. Businesses in developing countries like India require rapid business expansion to gain market share quickly. A business that uses the franchising business model can grow swiftly and gain market share. 

In a franchise model, the franchisor collaborates with business owners or entrepreneurs driven by ownership, profitability and the capital invested in the enterprise. It will help the success of the franchisee and the franchising business. These are the fundamental principles that govern a franchise business model and explain how does franchise model work. We hope you’ve learned how a franchisee operates and how you can start a successful franchise business from this blog. 

Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting. 

FAQs

Q: What are the types of franchise agreements?

Ans:

  • Single-unit franchise agreement
  • Multi-unit franchise agreement
  • Area development agreement
  • Master franchise agreement

Q: How does a franchise grow in a franchise model?

Ans:

Create a franchise expansion strategy that expands from the current business and initial locations. You may support your franchisees and increase brand recognition by doing this.

Q: How are franchisees and franchisors compensated in the franchise model?

Ans:

Royalties and other fees paid by franchisees provide income for the franchisor. Profits from sales and support agreements are the source of income for the franchise owner. 

Q: What exactly is a franchise business model?

Ans:

The franchise business model is built entirely around a brand. Customers purchase from a brand that a franchisor has built, and a franchisee purchases the right to use the same brand name, operate under it in a specific area, and sell its standardised goods.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.